DILI, East Timor - East Timor's ramshackle capital is dotted with rundown
buildings, old cars and squalid camps packed with thousands of people waiting to
return home after months of violence. But billions of dollars in largely
untapped oil and gas reserves lie just off the coast of Asia's newest and
poorest nation.

East Timor is zealously guarding its nascent oil and gas industry, seen as a
potential lifeline following centuries of colonial rule and foreign occupation
that crippled it politically and economically. It is determined not to follow
the path of several other mineral-rich countries that failed to prosper.

The tiny country created a petroleum fund last year to protect its mineral
wealth for future generations, which was lauded by the World Bank and other
international institutions. The government has vowed not to spend the money,
which so far pools income from two offshore fields, on golden palaces and
limousines but on roads, schools and health.

Rules that govern the fund - currently $600 million and growing - limit how
much the government can withdraw, and theoretically ensure a sustainable annual
income for the nation of less than 1 million inhabitants for decades to come.

"It's the absolute best way of preserving the nation's wealth,"
said Roger White, a British expert advising East Timorese energy officials under
an eight-year consultancy program funded by a grant from Norway.

"It is to prevent the difficulties that many oil rich nations have had -
either that their money is spent badly or when the oil and gas resources are
gone, there is nothing left," he said.

East Timor was plunged to the brink of civil war in May when then-prime
minister Mari Alkatiri - the fund's architect - dismissed 600 soldiers, sparking
clashes between rival security factions that spilled into gang warfare, looting
and arson attacks. Alkatiri was forced to resign as prime minister in July amid
allegations that he helped fuel the unrest, something he denies.

At least 30 people were killed and another 150,000 fled homes in the capital,
Dili, highlighting the country's continued political instability seven years
after it voted for independence from Indonesia.

East Timor survived largely on international aid when it first became a new
nation in 2002, following two years of U.N. administration, earning almost
nothing from its nascent petroleum industry.

Australia has been drilling for oil and gas for several years in an offshore
field that includes Bayo Undang, located on contested waters between the two
nations. After East Timor became independent, it was able to negotiate a
considerably higher share in oil and gas revenues.

Twenty million dollars in royalties from the Bayo Undang field were rolled
into the petroleum fund. Today it's worth more than $600 million, thanks to
production at the Bayo Undang and Elenka Katua fields, soaring oil prices and
interest payments, Alkatiri said in an interview with The Associated Press.

With an estimated 12 trillion cubic feet of natural gas beneath the Timor Sea
- slightly smaller than the reserves found under Brunei - the fund is expected
to keep growing.

A treaty signed with Australia in January to develop the Greater Sunrise gas
field - the largest in the Timor Sea - is expected to earn East Timor $4 billion
over the expected 30-year life of the project.

Abraao de Vasconselos, general manager)of the Banking and Payments Authority,
which manages the petroleum fund, said the money is invested in U.S. Treasuries
and each government withdrawal requires parliamentary approval.

"The idea is to protect the fund for future generations," he said.

But others noted that East Timor's ability to hold on to oil and gas as a
lifeline depends largely on the ability of the government - which is for the
first time trying to tap into the resource fund to pay for the 2006-2007 budget
- to effectively manage the revenues.

That means building an effective government and private work force by
improving health and education, and investing in agriculture, infrastructure and
rural development, said Jose Teixeira, Minister for Natural Resources, Minerals
and Energy.

"Nothing will replace prudent economic and financial management,"
he said.

It also means avoiding pitfalls of other oil-rich developing nations like
Chad, which saw a similar petroleum fund collapse after the government eased
restrictions on spending of the oil money.

The World Bank responded by suspending $124 million to the Central African
country, though the two sides have since signed an interim agreement restoring
the loans.

Some critics at home wonder why East Timor is not taking advantage of its oil
and gas reserves more quickly to rev up its economy and get people - who earn an
average of less than a dollar a month - back to their homes.

"If we have the money, let's use it and not beg" from other
countries, said Mario Carrascalao, a former East Timor governor. "It's not
the way, we have to be responsible."

But White noted that East Timor, which was colonized for centuries by
Portugal before coming under Indonesian occupation in 1975, needs to build an
efficient bureaucracy before it can exploit the economic potential of its
petroleum resources.

"There are very few experienced bureaucrats," he said. The country
has had to start from scratch building all apparatus of government and does not
necessarily know how to spend the money wisely, he added.

"It's the birth pains of a new nation," White said.

The recent instability also highlighted the risks of doing business in East
Timor.

The government was forced to postpone signing oil and gas exploration
contracts in other offshore areas with Italian oil and gas giant Eni SpA and
India's Reliance Petroleum Ltd., said White. Gangs barged into a building that
contains the offices of several senior energy officials and looted computers and
supplies, he said. Several local staffers have yet to return to work, he added.

The deals are still on, Teixeira said, and they may be signed in the next few
weeks.

"We were just within three weeks of signing these big contracts and
having enormous work for the good of the country and now it's just
waiting," White said. "It's an absolute tragedy."

- Para 4: There are no RULES that govern the withdrawal of revenue from the
Petroleum Fund. The value of Estimated Sustainable Income is only a GUIDE. If
Parliament wishes, it may withdraw greater than the value of ESI and the
Petroleum Fund Act can not prevent this.

- Throughout: The petroleum field names are spelled incorrectly.

In response to the 'critics at home (who wonder why East Timor is not taking
advantage of its oil and gas reserves more quickly)' Gomez refers to, the
following should be noted:

- East Timor's Petroleum Fund Act was established in August last year. Since
a Government budget has not been passed until now, there has not been until now
an opportunity to withdraw from the Petroleum Fund via this mechanism.

- Prior to the establishment of the Petroleum Fund Act only FTP was saved and
taxes from petroleum exploitation were spent. In that regard it could be argued
that East Timor has already 'spent' some of its 'petroleum revenue'.

However, (Gomez quotes) Adviser Mr White is correct in explaining that an
efficient bureaucracy must be built before much greater amounts of revenue
(petroleum of otherwise) are committed to budget expenditure. It is noted that
budget execution to date has been relatively poor so there is no point
increasing sectoral budgets until they have the capacity to spend them wisely.

Finally, Mr Gomez neglected to mention that East Timor's oil and gas
exploration bidding process was highly transparent; the Evaluation Commission
reports of the Bid Process are published on the Government's Oil and Gas
Directorate website (http://www.timor-leste.gov.tl/emrd/). This is, I
understand, perhaps the first time a Bid Report has been published.